OPEC+ Stalemate, New Covid Lockdowns Send Oil Prices Lower

Reports that members of the Organisation of Petroleum Exporting Countries and its allies (a group known as OPEC+) are at variance over February crude oil output quota erased gains recorded by oil prices in early trading Tuesday.

Brent oil futures had lost about 0.70% to trade at $50.70 per barrel as of 9:15 am West African Time, and the U.S. West Texas Intermediate (WTI) futures were down more than 0.50% to trade at $47.55 a barrel. Oil prices had climbed to $53 a barrel on Monday, the highest since March 2020.

Both major benchmarks lost more than 1% during the last trading session after it emerged that the oil cartel was forced to extend Monday’s Joint Ministerial Monitoring Committee taking place virtually by a day due to disagreement among members on output levels for next month.

A Reuters report says Iraq, Nigeria, and the United Arab Emirates suggested maintaining current production cuts while Kazakhstan and Russia are pushing for an increase. Moscow reportedly wants the quota raised by 500,000 barrels per day.

Current oil production cuts are estimated at 7.2 million bpd in January compared to 7.7 million bpd in December, an increase of 500,000 bpd after OPEC+ agreed to loosen output cuts from this month.

With a section of the cartel now pushing for a further increase in production, Nigeria’s OPEC Secretary-General Mohammad Barkindo has warned OPEC+ members of downside risks facing the oil market.

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The deadlock has pushed discussion further into Tuesday though it is likely that the group will reach a decision to keep existing production cuts.

Besides the OPEC+ stalemate, the plunge in oil prices was also driven by worries over fuel demand as global Covid-19 cases continue to rise and more nations introduce restrictive measures.

The United Kingdom Prime Minister Boris Johnson late Monday announced new coronavirus lockdowns for England and Scotland as a more infectious new variation of the virus fuels rising caseloads throughout the country.

The new restrictions, similar to the national lockdown Johnson announced last March, replaces a tiered system that assigned different restrictions to different regions of the country. 

It requires people to stay home except for work – if they cannot work remotely – for essential shopping, local exercise once per day, medical needs or to flee the threat of harm.

“The oil market toppled head over heels with broader markets as the sum of all fear for oil market concerns centers around lockdown consternations,” Chief Global Market Strategist at Axi, Stephen Innes, said in a note.

“The most worrying aspect for oil market concerns is the case of a brave new year giving way to the same old fear as the re-imposition of worldwide lockdown to defend against the coronavirus’s mutant strain will pose the greatest near-term risk on the path back to oil demand normalcy,” Innes said.

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Analysts expect oil prices to average just above $50 this year according to a monthly Reuters poll of 39 experts and economists.

The analysts raised their average expectations for Brent Crude prices for 2021 to $50.67 per barrel, up from the forecast of $49.35 a barrel in November. Meanwhile, the U.S. WTI benchmark is expected to average $47.45 a barrel in 2021, from a prior forecast of $46.40 per barrel.

The major downside risk for prices in 2021 will be the mutating strains of the coronavirus that threaten economic and oil demand recovery with lockdowns and travel restrictions, they said.

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